By Ugo Bardi
26 November, 2011
Cassandra's legacy
Cassandra's legacy
When the new Italian Prime Minister, Mr. Mario Monti, gave his acceptance speech
to the Senate, a few days ago, he used 28 times the term "growth" and
not even once terms such as "natural resources" or "energy". He is not
alone in neglecting the physical basis of the world's economy: the
chorus of economic pundits everywhere in the world is all revolving
around this magic world, "growth". But why? What is that makes this
single parameter so special and so beloved?
During
the past few years, the financial system gave to the world a clear
signal when the prices of all natural commodities spiked up to levels
never seen before. If prices are high, then there is a supply problem.
Since most of the commodities we use are non-renewable - crude oil, for
instance - it is at least reasonable to suppose that we have a depletion
problem. Yet, the reaction of leaders, decision makers, and economic
pundits of all kinds was - and still is - to ignore the physical basis
of the economic system and promote economic growth as the solution to
all our problems; the more, the better. But, if depletion is the real
problem, it should be obvious that growth can only make it worse. After
all, if we grow we consume more resources and that will accelerate
depletion. So, why are our leaders so fixated on growth? Can't they
understand that it is a colossal mistake? Are they stupid or what?
Things are not so simple, as usual. One of the most
common mistakes that we can make in life is to assume that people who
don't agree with our ideas are stupid. No, there holds the rule that for
everything that exists, there is a reason. So, there has to be a reason
why growth is touted as the universal cure for all problems. And, if we
go in depth into the matter, we may find the reason in the fact that
people (leaders as well as everybody else) tend to privilege short term
gains to long term ones. Let me try to explain.
Let's start with observing that the world's economy
is an immense, multiple-path reaction driven by the thermodynamic
potentials of the natural resources it uses. Mainly, these resources are
non-renewable fossil fuels that we burn in order to power the whole
system. We have good models that describe the process; the earliest ones
go back to the 1970s with the first version of "The Limits to Growth" study. These models are based on the method known as "system dynamics"
and consider highly aggregated stocks of resources (that is, averaged
over many different kinds). Already in 1972, the models showed that the
gradual depletion of high grade ores and the increase of persistent
pollution would cause the economy to stop growing and then decline; most
likely during the first decades of the 21st century. Later studies of
the same kind generated similar results. The present crisis seems to
vindicate these predictions.
So, these models tell us that depletion and
pollution are at the root of the problems we have, but they tell us
little about the financial turmoil that we are seeing. They don't
contain a stock called "money" and they make no attempt to describe how
the crisis will affect different regions of the world and different
social categories. Given the nature of the problem, that is the only
possible choice to make modelling manageable, but it is also a
limitation. The models can't tell us, for instance, how policy makers
should act in order to avoid the bankruptcy of entire states. However,
the models can be understood in the context of the forces that move the
system. The fact that the world's economic system is complex doesn't
mean that it doesn't follow the laws of physics. On the contrary, it is
by looking at these laws that we can gain insight on what's happening
and how we could act on the system.
There are good reasons based in thermodynamics that
cause economies to consume resources at the fastest possible rate and at
the highest possible efficiency (see this paper
by Arto Annila and Stanley Salthe). So, the industrial system will try
to exploit first the resources which provide the largest return. For
energy producing resources (such as crude oil) the return can be
measured in terms of energy return for energy invested (EROEI).
Actually, decisions within the system are taken not in terms of energy
but in terms of monetary profit, but the two concepts can be considered
to coincide as a first approximation. Now, what happens as non-renewable
resources are consumed is that the EROEI of what is left dwindles and
the system becomes less efficient; that is, profits go down. The economy
tends to shrink while the system tries to concentrate the flow of
resources where they can be processed at the highest degree of
efficiency and provide the highest profits; something that usually is
related to economies of scale. In practice, the contraction of the
economy is not the same everywhere: peripheral sections of the system,
both in geographical and social terms, cannot process resources with
sufficient efficiency; they tend to be cut off from the resource flow,
shrink, and eventually disappear. An economic system facing a reduction
in the inflow of natural resources is like a man dying of cold:
extremities are the first to freeze and die off.
Then, what's the role of the financial system - aka,
simply "money"? Money is not a physical entity, it is not a natural
resource. It has, however, a fundamental role in the system as a
catalyst. In a chemical reaction, a catalyst doesn't change the chemical
potentials that drive the reaction, but it can speed it up and change
the preferred pathway of the reactants. For the economic system, money
doesn't change the availability of resources or their energy yield but
it can direct the flow of natural resources to the areas where they are
exploited faster and most efficiently. This allocation of the flow
usually generates more money and, therefore, we have a typical positive
(or "enhancing") feedback. As a result, all the effects described before
go faster. Depletion can be can be temporarily masked although,
usually, at the expense of more pollution. Then, we may see the abrupt
collapse of entire regions as it may be the case of Spain, Italy, Greece
and others. This effect can spread to other regions as the depletion of
non renewable resources continues and the cost of pollution increases.
We can't go against thermodynamics, but we could at
least avoid some of the most unpleasant effects that come from
attempting to overcome the limits to the natural resources. This point
was examined already in 1972 by the authors of the first "Limits to
Growth" study on the basis of their models but, eventually, it is just a
question of common sense. To avoid, or at least mitigate collapse, we
must stop growth; in this way non renewable resources will last longer
and we can use them to develop and use renewable resources. The problem
is that curbing growth does not provide profits and that, at present,
renewables don't yet provide profits as large as those of the remaining
fossil fuels. So, the system doesn't like to go in that direction - it
tends, rather, to go towards the highest short term yields, with the
financial system easing the way. That is, the system tends to keep using
non renewable resources, even at the cost of destroying itself. Forcing
the system to change direction could be obtained only by means of some
centralized control but that, obviously, is complex, expensive, and
unpopular. No wonder that our leaders don't seem to be enthusiastic
about this strategy.
Let's see, instead, another possible option for
leaders: that of "stimulating growth". What does that mean, exactly? In
general, it seems to mean to use the taxation system to transfer
financial resources to the industrial system. With more money,
industries can afford higher prices for natural resources. As a
consequence, the extractive industry can maintain its profits, actually
increase them, and keep extracting even from expensive resources. But
money, as we said, is not a physical entity; in this case it only
catalyzes the transfer human and material resources to the extractive
system at the expense of subsystems as social security, health care,
instruction, etc. That's not painless, of course, but it may give to the
public the impression that the problems are being solved. It may
improve economic indicators and it may keep resource flows large enough
to prevent the complete collapse of peripheral regions, at least for a
while. But the real attraction of stimulating growth is that it is the
easy way: it pushes the system in the direction where it wants to go.
The system is geared to exploit natural resources at the fastest
possible rate, this strategy gives it fresh resources to do exactly
that. Our leaders may not understand exactly what they are doing, but
surely they are not stupid - they are not going against the grain.
The problem is that the growth stimulating strategy
only buys time (and buys it at a high price). Nothing that governments
or financial traders do can change the thermodynamics of the world
system - all what they can do is to shuffle resources from here to there
and that doesn't change the hard reality of depletion and pollution.
So, pushing economic growth is only a short term solution that worsens
the problem in the long run. It can postpone collapse but at the price
of making it more abrupt in the form known as the Seneca Cliff. Unfortunately, it seems that we are headed exactly that way.
[This post was inspired by an excellent post on the financial situation written by Antonio Turiel with the title "Before the Wave" (in Spanish). ]
Ugo Bardi is a professor of
Chemistry at the Department of Chemistry of the University of Firenze,
Italy. He also has a more general interest in energy question and is the
founder and president of ASPO Italia.
